Stock Analysis & Ideas

Jim Cramer Advises: Recession-Proof Your Portfolio With Packaged Food Stocks. Here Are 2 Names Analysts Like

Now that we’re into the third quarter, we’re stating to see the pundits sound off on what the Q2 economic data will show – and some of them are openly saying that second quarter GDP will record a contraction. Coming on the heels of the 1.6% contraction in Q1, this will put the US in a technical recession. Along with rising inflation and the Fed’s turn to higher rates and monetary tightening, this adds up a darkening economic picture.

But Jim Cramer, the well-known host of CNBC’s ‘Mad Money’ program, is “not totally convinced” that a recession is in the offing. He believes the economy retains enough strength to dodge that bullet – but he is not fully wiling to ignore the possibility. And so, Cramer has been looking for strong defensive stocks to shore up a portfolio’s position for the near- to mid-term.

His solution: “Food stocks can become recession-proof safe-havens. But you have to be selective, which means sticking with the winners that we know are doing well… nearly everybody seems convinced that we’re headed into a recession, and while I’m not totally convinced, that creates a much better backdrop for the ‘Steady Eddie’ packaged food stocks.”

With this in mind, we’ve used the TipRanks database to pinpoint two stocks in the packaged food sector. Each is a Strong Buy, according to the analyst community, and has a considerable upside potential for the coming year. Let’s take a closer look.

The Hain Celestial Group (HAIN)

First up is Hain Celestial, a major player in the natural foods and botanical personal care products niches. Hain owns and markets a wide range of beverages and foods, including the Celestial Seasonings herbal teas, the popular Mexican fruit soda brand Joya, and Empire Kosher poultry. In its personal care line, the company boasts such brands as Jason, Alba, and Avalon Organics. The company’s largest market is North America, where sales grew more than 13% in the first part of this year.

For Q3 of fiscal 2022, the company reported $502.9 million in total net sales. That was up a modest 2% year-over-year, but still the highest in the last 5 quarters. Hain reported 33 cents per share in adjusted EPS for the quarter, down 25% from the year-ago figure of 44 cents.

The company’s International sales were down 14% in the quarter, to $177.2 million of the total sales. Hain has been moving, in recent quarters, to divest itself of lower-profit and lower-margin segments and brands, as a strategy to streamline the business.

Hain reported a modest growth in cash assets as of the end of fiscal Q3, with $57.8 million in liquid assets on hand. This was a 9% gain compared to the $53 million reported one year earlier.

Cowen analyst Brian Holland has reviewed Hain’s recent performance, and comes down on the side of the bulls, writing: “The pivot from an overly complex holding company to a streamlined operator has yielded share growth, margin improvement, and a healthier balance sheet—all of which have effectively positioned Hain for the next phase of its evolution to a high growth health & wellness captain.”

“In our view current valuation is overly punitive, most notably in response to transitory factors weighing on the company’s International segment. We think our model and consensus appropriately capture the nearer term headwinds, and ultimately believe the International business could be divested which presumably would catalyze a rerating in the stock,” the analyst added.

Holland’s model gives the stock an Outperform (i.e. Buy) rating, and a $34 price target. If the target is achieved, HAIN could provide 44% returns over the next 12 months. (To watch Holland’s track record, click here)

The Cowen view on Hain is no outlier. This stock has picked up 8 analyst reviews recently, and these include 7 Buys against just 1 Hold, for a Strong Buy consensus rating. The shares are priced at $23.58 and the $34.88 average target implies ~48% upside in the months ahead. (See HAIN stock forecast on TipRanks)

Hostess Brands (TWNK)

The next stock is one of America’s iconic snack brands, Hostess. The makers of Twinkies, HoHos, and Donettes, Hostess has provided both snacks and joy for more than a century. The company has eschewed the health niches of the food industry, and instead focused on doing one thing, making long-shelf-life cakes and snacks that appeal to kids. In this, Hostess has succeeded.

That success can be measured objectively in the most recent earnings report, released in May for 1Q22. Hostess saw solid growth in multiple key metrics, including total revenues, gross profits, and adjusted EPS. At the top line, the revenue of $332 million was up 25% year-over-year; gross profits rose 21% to $115 million, and adjusted EPS climbed 35% y/y, from 20 cents to 27 cents.

Management attributed the strong growth to several factors, all of which bode well for the company going forward. First was a 15% increase in consumer demand, which was described as ‘strong’ and ‘broad-based.’ The rest of the revenue growth was attributed to a combination of a favorable product mix and sound product pricing. While Hostess did report small drops in operating and free cash flows for the quarter, the company’s cash and cash equivalents increased y/y, growing by 20% to reach $238.4 million.

Furthermore, where the broader markets are down this year, with the S&P 500 in bear territory, TWNK shares have outperformed, gaining 5%.

Looking ahead, Truist analyst Bill Chappell believes the company is solidly positioned to remain competitive and successful, even should economic conditions worsen. He writes, “As the cost environment has worsened, TWNK is taking more pricing starting in 2H (we note there will be gross margin lag in 2Q), which it has seen little pushback to date. As we look ahead, we see the potential for upside to the sales guidance as it assumes MSD% volume growth and more than 10% in pricing efforts (with more rounds coming in 2H), but believe it is wise to be prudent in this difficult to navigate environment.”

“All in, we continue to believe the company has positioned itself well across the snacking category, and we believe the multiple should continue to move higher given its consistent performance during a difficult to navigate environment,” the analyst summed up.

Chappell’s comments back up his Buy rating on Hostess stock, while his $30 price target indicates potential for 39% growth over the next 12 months. (To watch Chappell’s track record, click here)

Overall, it’s not just kids who like Hostess. Wall Street has given the stock a Strong Buy consensus rating, which is based on a 6 to 1 split in the analyst reviews, favoring Buys over Holds. The share price of $21.52 and the average price target of $26.86 together point toward ~25% one-year upside. (See Hostess stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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